Finite Reinsurance
Finite Reinsurance is a type of reinsurance that transfers only a finite or limited amount of risk to the reinsurer. Risk is reduced through accounting or financial methods, along with the actual transfer of economic risk. By transferring less risk to the reinsurer, the insurer receives coverage on its potential claims at a lower cost than traditional reinsurance. Due to the highly complex structure of these risk instruments, there can be abuses where no risk is transferred and the insurer's income is improved. Because of recent abuses by several insurers, the NAIC is moving to take immediate action on the finite reinsurance issue.
Work on this issue began with the Property and Casualty Reinsurance Study Group of the Reinsurance (E) Task Force. At recent meetings, the group discussed the various issues of finite reinsurance from a financial solvency perspective. In an effort to eliminate abuse of finite reinsurance contracts, the group determined that insurers should make specific disclosures on their financial statement filings. At the NAIC Summer Meeting in Boston, proposed changes to the NAIC Property and Casualty Annual Statement Blank and to the Statement of Statutory Accounting Principle (SSAP) 62 were forwarded to the Blanks (E) Working Group and the Statutory Accounting Principles (E) Working Group respectively. The proposed changes to the 2005 blank were exposed with a July 1 comment deadline and were adopted by the Blanks Working Group on July 13, 2005, the Accounting Practices & Procedures Task Force on July 27, 2005, the E Committee on August 17 th, 2005 and the Executive Committee and the Plenary on October 14, 2005.
Following is the disclosure as adopted and required for year-end 2006 financial statements: Revisions to the Annual Statement Blank [Word]
In addition, the Statutory Accounting Principles Working Group will require these interrogatories to be audited starting with year-end 2006 reports due regulators on June 1, 2007.
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